It's just how lilo works. There is a hint in the manpage as to a case you may want to be in a different directory other than your / directory (the -r switch, which does a chroot to the dir you specify). The example given where this may be useful is if you are repairing a setup from a boot floppy.
> It seems to me that everytime I upgraded or installed a new > version of the lilo, the configuration would also failed unless > the currect directory is at root ('/'). > > Any idea why and/or fixes? TIA! Ours is not to reason why, just to get on with it!!! Jonathan